Should The Senate Pass Online Sales Tax Legislation? [Updated]

Currently in the U.S., state governments are only obligated to collect sales taxes from online retailers that are based in their own states. If an online sales tax bill makes it to law, states could collect from online retailers that don’t reside in their state.

There’s a good chance you’ve heard of the Marketplace Fairness Act (S.336), before. The bill aims to ensure that states receive taxes that they’ve been otherwise missing out on. A similar proposal is up for vote in the Senate this week thanks to an amendment to a Democratic budget resolution from Senators Mike Enzi and Dick Durbin (pictured), who sponsored the bill.

Opponents are slamming the Senators for trying to “sneak” the legislation through. The Hill reports:

“There are good reasons this policy hasn’t been considered in the US Senate for over a decade: Taxpayers don’t like it, it turns the Internet into a tax collection platform, it allows state tax collectors to exercise authority far beyond their boundaries and it will put thousands of small businesses out of business,” Bond, a top Commerce Department official under George W. Bush, said in a statement.

The Marketplace Fairness Act grants states the authority to compel online and catalog retailers (“remote sellers”), no matter where they are located, to collect sales tax at the time of a transaction – exactly like local retailers are already required to do. However, there is a caveat: States are only granted this authority after they have simplified their sales tax laws.

Simplification is required because of two Supreme Court rulings (Bellas Hess and Quill, described below) cite concern that collecting sales tax for multiple states would be too difficult.

The Marketplace Fairness Act requires that states must simplify their sales tax laws in order to ease those concerns and make multistate sales tax collection easy. Specifically, states seeking collection authority have two options for simplifying their sales tax laws.

Under the Marketplace Fairness Act, states can join others that have already adopted “simplification measures” of the Streamlined Sales and Use Tax Agreement (SSUTA) or they can meet five mandates listed in the bill. States would have to agree to:

Notify retailers in advance of any rate changes within the state

Designate a single state organization to handle sales tax registrations, filings, and audits

Establish a uniform sales tax base for use throughout the state

Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there)

Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data

You can take a look at the bill here. Hundreds of national trade associations, state and local trade associations and businesses support the bill. These are listed here. They include Amazon, Autozone, Barnes and Noble, Bed, Bath, & Beyond, Best Buy, Buy.com, Foot Locker, Gap, Home Depot, Kroger, Lowes, Meijer, J.C. Penney, Safeway, Sears, Petsmart, and Walmart, to name a few.

AT&T, Council on State Taxation, National Cable and Telecommunications Association, National Federation of Independent Business, and Verizon are listed as neutral or undecided.

The main difference between the Marketplace Fairness Act, and what is coming up for vote this week, is that the new proposal doesn’t include the mandatory simplification, and is non-binding, as CNET’s chief political correspondent Declan McCullagh explains.

“It appears to be intended as a clever political hack: secure plenty of votes on a non-binding Internet tax amendment, then use those vote totals to argue there’s sufficient support for S.336 when it’s up for a binding vote later,” he says, before going to quote eBay’s senior director of federal government regulations and global public policy, Brian Bieron:

“The strategy of the bill’s supporters is to offer this general amendment and then claim that all the senators that vote for it support the bill. That is not just a stretch, it is not accurate. But the game plan is to rack up a sizable vote and then make the claim the bill itself should jump over the Finance Committee and go right to the floor.”

Hence the “sneaking” accusations.

Some supporters of the legislation think it’s really just a matter of when, rather than a matter of if, and whatever happens with this week’s vote could have a significant bearing on that.